OREANDA-NEWS. S&P Global Ratings has revised its outlook to negative from stable and affirmed its 'A' issuer credit rating on Basin Electric Power Cooperative, N. D.

At the same time, S&P Global Ratings affirmed, with a negative outlook, its 'A' rating on the utility's $925 million first mortgage obligations, 2015 series C and $150 million Campbell County Wyoming solid waste facilities revenue bonds 2009 series A. S&P Global Ratings also assigned its 'A' rating with a negative outlook to the following debt issues:$250 million first mortgage obligations, 2015 series A;$285 million first mortgage obligations, 2015 series B; and $40 million first mortgage obligations, 2015 series BK notes. In addition, S&P Global Ratings affirmed its 'A-1' rating on the utility's commercial paper (CP).

The outlook revision reflects declining debt service coverage (DSC) in recent years. The ratio fell to 1.14x in 2015 from 1.75x in 2012 as the margins from Basin's non-utility businesses migrated from a positive $82.5 million in 2012 to a $57.6 million loss in 2015. Weather conditions also reduced electricity demand in 2015, which affected financial performance.

"We believe the decline highlights the utility's exposure to variable weather conditions, the cooperative's non-utility subsidiaries' margins sensitivity to the negative effects of low natural gas prices, and the pressures that debt added to support generation and transmission investments create. Low natural gas prices erode margins on the subsidiaries' synthetic gas sales, and their sales of the byproducts of synthetic gas production," said S&P Global Ratings credit analyst David Bodek. "Low natural gas prices also erode the margins from surplus electricity sales," Mr. Bodek added.

Basin's board has increased the wholesale rates for the electric sales it makes to members, which tempered the effects of weak non-member margins. But based on our ratio analysis, we regard those adjustments as insufficient to preserve DSC at historical levels. We consider strong DSC integral to the ratings because excess margins help shield lenders from the volatile margins of the competitive businesses the utility operates through its subsidiaries.

Basin is a Bismarck, N. D.-based electric generation and transmission (G&T) cooperative. In 2015, it was the largest U. S. electric cooperative in terms of total energy sales and member energy sales. Its 19 members supply wholesale electricity to nearly 3 million customers through 138 retail electric systems whose service territories cover portions of nine states extending from the Canadian to Mexican borders.

The negative outlook reflects our view that Basin's exposure to competitive wholesale markets, the weather's impacts on customers' energy demand, and its concentration in coal-fired resources, which could erode financial performance or perpetuate recent years' weak DSC.

We could revise the outlook to stable if rate increases and cost-cutting measures sufficiently shield the utility from competitive markets and strengthen DSC to levels consistent with the business risks Basin exhibits relative to that of other cooperatives that source more revenues from customers with long-term contracts aligned with their debt.

We could lower the rating if DSC remains at levels we consider weak relative to the business risks the utility faces, whether due to exposure to weather patterns that erode customer electricity demand or because of unfavorable prices in volatile commodity markets.